Is This How a Market Behaves Before It Tops?

If you have profits you’ve been riding a couple of years or longer, now would be a good time to take inventory to protect yourself and put reasonable stops in place, asserts Jeff Greenblatt, director of Lucas Wave International and editor of The Fibonacci Forecaster.

Last week we discussed the socionomic impact of President Trump’s historic visit to Saudi Arabia. The political pundits will look at it one way, but as traders we must look at it through the lens of the market and mass crowd psychology. History suggests historic agreements materialize much closer to market tops as opposed to bottoms.

Recently markets got hit as the political and financial worlds collided. Varney on Fox Business was right, traders are scared the political scandals are getting in the way of Trump’s growth and tax cut agenda. Trump was out of the country for a week, the market improved. Trump came home, conditions are thick again. Mind you, I’m not editorializing on Trump’s politics, this is a pure social observation of what we see. Other economic experts are starting to voice their concerns of the current state of the state.

The larger concern is whether this constant drip, drip, drip of tough news will sour the consumer that may create a lasting effect that will make the bear come out growling. As a market historian, I dipped into the catalog in my mind to recall the last time the market seriously collided with the political events of the day. We could talk about the Gulf Wars but this one runs deeper and what comes to mind is 1968. Go back to the 1960s and you’ll recall a double top in 1966 and 1968. The last time the nation had this kind of social unrest was that era. I thought we’d look at the events that led to the top.

Here is the weekly chart of 1968 and 1969. The market had initially peaked in February 1966 at 1001 but recovered to the high at 994 by December 1968. The very unpopular Vietnam war raged and the first shoe to drop was the equally disliked LBJ who decided not to seek nor would he accept the nomination of his party to run for president again. That was March 31. Less than a week later Dr. Martin Luther King was assassinated. Both events came after a 26-week correction of 14% in the Dow. Almost exactly two months later RFK was assassinated just as it appeared he would win the nomination after winning the California primary. Think of how traumatic it was. The country was still healing from the assassination of JFK, now it lost the second Kennedy but the Democratic Party lost the two biggest personalities it had in a space of two months due to one reason or another. Then put the MLK tragedy in the mix. Somehow the market survived and only dropped 7% from May to August. Then the nation had to deal with the Chicago riots at the Democratic National Convention.

I’m not going to catalog current events for you, there are enough outlets for that. But I think we can all agree, whichever side of the aisle you are on, these are very serious times we are living in. You can see eventually the crowd had enough and finally rolled over. It didn’t stop going down until the Kent State shooting which was the traumatic event of the day. That was the bad news event that bottomed the market. The Dow eventually made a higher high and a lower low before it faded into oblivion until Reagan came along.

Our current euphoria market is going to wake up. It’s only a matter of time. I’ve offered up a cycle point tied to both 1966 and 1987 coming due in the fall. History shows us mass crowd psychology will only take so much. Do not take this information as an invitation to bet the farm right here. There are some warning signs but if you have profits you’ve been riding the past couple of years or longer, now would be a good time to take inventory to protect yourself and put reasonable stops in place.